What funds do you have available to invest? Are you willing to borrow in order to increase the size of your investment? How much time do you have to manage your investment? What is your level of expertise? Will you be working with partners that have similar objectives and constraints?

Identifying and analyzing a real estate investment opportunity

1.Determine your objectives and constraints

1a.It is important to know your investment goals:

• Are your willing to risk losing your investment for the possibility of a high return?
• Do you prefer more modest returns but a safer investment?
• Are you willing to put in “sweat equity” or do you want a turn-key investment?
• What is the duration of your investment? (Long-term vs short-term)
• Are you looking for a steady cash flow or is the growth of the value of your investment more important?

1b.It is equally important to know your constraints:

• What funds do you have available to invest?
• Are you willing to borrow in order to increase the size of your investment?
• How much time do you have to manage your investment?
• What is your level of expertise?
• Will you be working with partners that have similar objectives and constraints?

2.Analyze the Investment and Market Environment

• A thorough analysis of the investment environment is required for any investment decisions, including real estate. This would include an analysis of:
• The market environment
• The legal environment
• The financing environment
• The tax environment

3.Develop a Financial Analysis

• The financial analysis deals with determining the expected cash flows of your real estate investment. At the end of the analysis you will be able to answer questions such as:
• How much will I invest?
• Determining a fair price
• How much cash will be generated annually?
• Rents
• Expenses
• How much are the mortgage payments?
• How much is the profit when I sell?
• Anticipated value
• Selling expenses

4.Apply Decision-Making Criteria

• Determine the required rate of return given the risks and rewards as analyzed in the previous steps.
• Calculate the Net Present Value (NPV) and Internal Rate of Return (IRR) of the real estate investment and compare them to these hurdle rates.

5.Investment Decision

• The previous steps give you the necessary information to make your investment decision
• The analysis process is repeated for various REIs in order to find one that meets the investors’ goals and constraints